Standard Insurance Renewal

Options For Use of Excess PDA Reserves - Revisited

April 17, 2007

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• Review background information regarding source and availability of funds (PDA reserves vs. Standard Demutualization proceeds)

• Review advantages & disadvantages of PDA options identified to-date– Option #1 – Do nothing at this time– Option #2 – Provide a subsidy to decrease rates for voluntary life – Option #3 – Provide a “rate holiday” for some or all lines of voluntary

coverage– Option #4 – Increase the amount of employer-paid basic life coverage– Option #5 – Provide a subsidy to decrease rates for all voluntary

coverages or for life & disability only– Option #6 – Provide a “basic” employer-paid LTD benefit – Option #7 – Subsidize cost of medical coverage for employees on long-

term disability• Discuss next steps

Agenda

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PDA Reserves vs. Standard Demutualization Proceeds

• Excess PDA reserves were generated by favorable claims experience and interest earnings on Standard employee-paid voluntary life and long term disability policies over the last 7 years; primary growth occurred during the 2004-2006 time period

– These funds are currently held by Standard – Excess PDA funds totaling $16.3m are currently available to PEBB

• Standard demutualization proceeds arose from Standard’s 1998 decision to convert from a mutual insurance company to a stock company, requiring distribution of surplus assets; the State’s share of the demutualization proceeds are attributable to contributions made by the State and its employees under SEBB and BUBB policies dating back to the 1970s

– These funds are currently held in a State trust account and are not available to PEBB until a final legal settlement has been reached with all parties claiming an interest in the State’s share of the demutualization proceeds

– PEBB’s share of the demutualization proceeds is currently unknown– Decisions cannot be made on the use of these funds until PEBB’s share of the

proceeds is known and the funds are available to PEBB

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Option #1 – Do Nothing At This Time

• Pros– Allows Board to consider proceeds of the Standard

demutualization settlement as well as PDA reserves– May permit identification of other options requiring

funds in excess of current PDA reserves

• Cons– Reserves continue to grow– No immediate benefit to employees– May preclude some options for 2008 if Open

Enrollment deadline is missed

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Option #2 – Provide A Subsidy to Decrease Rates for Voluntary Life

• Pros– Ties use of reserves to line of coverage that contributed the most to the

growth in reserves – Projected to last approx. 10 years; Board could review annually to stop or

adjust up or down– Increases affordability of voluntary life coverage; may increase

participation rates• Cons

– Subsidy does not benefit all voluntary life participants who contributed to the reserve

– Subsidy does not benefit LTD participants who contributed approx. 40% of the reserve

– Participants do not benefit proportionate to their contribution to the reserves; includes new participants who made no contribution

– Employees will face a “cliff” when the unsubsidized rates resume

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Option #3 – Provide A “Rate Holiday” (Some Or All Lines)

• Pros– Provides a greater benefit to participants who

contributed to the growth of reserves (holiday only available to those currently enrolled)

– Could limit rate holiday to voluntary life & LTD (i.e., the 2 lines that contributed to the reserves)

• Cons– May be technically difficult to administer; requires

payroll centers to differentiate between new & existing enrollees and coverage amounts & to stop & start deductions

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Option #4 – Increase The Amount of Employer-Paid Life Insurance Coverage • Pros

– Provides a source of funding to the State to increase coverage for basic needs e.g., funeral expenses

– May provide an additional recruitment tool– May be sustainable for an indefinite period due to relatively low cost compared to

interest earnings on the reserve (Cost of each $5K of additional coverage is $594,251 per year.)

– Could be adjusted upwards over time– Related to primary source of reserves (i.e., voluntary life)

• Cons– Would benefit all current and future employees; not limited to those who

contributed– May place PEBB in the role of the employer (i.e., the employing agency is currently

responsible for funding basic life coverage)– Additional term life insurance may not be needed by all employees (i.e., those with

no dependents or other financial resources)

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Option #5 – Provide A Subsidy To Decrease Rates for All Lines

• Pros– Spreads reserves across all lines of voluntary coverage to benefit

more members– Projected to last approx. 10 months with 100% subsidy or 100

months (8 years) with 10% subsidy etc. (assuming no increase in participation rates or amount of coverage)

– Increases affordability of voluntary coverages; may increase participation rates

– May be easier to administer than some other options• Cons

– Participants do not benefit proportionate to their contribution to the reserves; includes new participants who made no contribution

– Employees will face a “cliff” when the unsubsidized rates resume

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Option #6 – Provide A “Basic” Employer-Paid LTD Benefit

• Pros– Many employers make some level of “basic” employer-paid long-term disability coverage – Addresses critical financial need common to all State employees. Benefit is reduced by amount

of PERS/SS disability benefits (PERS disability benefit is limited to those with more than 10 years service; PERS & SS benefits are limited to those who are totally and permanently disabled)

– Easy to administer e.g., employer pays for basic benefit equal to 40% of pre-disability income with a 180 day waiting period; employees may purchase supplemental coverage to enhance benefit or reduce waiting period

– Employer cost is moderate compared to financial need (Preliminary quote from Standard is $3.7m per year)

– Reserves would last approx 4.5 years • Cons

– May establish a precedent where the State looks to PEBB reserves to fund new “employer-paid” benefits

– Participants do not benefit proportionate to their contribution to the reserves; includes new participants who made no contribution

– Agencies will face a “cliff” when the PDA funds are exhausted; if not continued, may be perceived as a “take-away” by employees

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Option #7 – Subsidize Cost Of Medical Coverage While On Long-Term Disability

• Pros– Addresses critical financial need for employees with reduced income due to a long-term

disability i.e., employer-paid medical coverage would be provided while on COBRA continuation coverage due to disability longer than six months, irrespective of whether the employee has elected Standard LTD coverage and is receiving Standard LTD benefits

• Cons– May benefit participant who made no contribution to reserves– May establish precedent where the State looks to PEBB reserves to fund new “employer-paid”

benefits– May increase State’s OPEB liability, depending on whether the benefit is considered a “short-

term” benefit as defined by GASB – Difficulty in estimating financial cost to PEBB without further information e.g., total incidence

and duration of disability in state workforce, irrespective of Standard LTD coverage– More difficult to administer than addressing underlying financial need through provision of

employer-paid LTD benefit e.g., administrative need to verify disability status for employees without LTD coverage and certify on-going eligibility to medical carriers

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Next Steps?